Safe and smooth transportation is essential for business profitability in the long run. If you fail to make timely deliveries, attend meetings, or visit sites, there’s a high chance your competitors will win the larger share of your target market.
This makes having a vehicle for day-to-day business operations essential. But does that mean you should blow your entire capital on a car? And what if you don’t even have enough capital to begin with?
In this post, we’ll answer these questions by sharing some easy ways to finance your business car. Trust us, you don’t need to drain your cash to buy a business vehicle. There is a way to balance expenses and have a business car. And it’s called a business auto loan.
Let’s check it out!
What Is A Business Auto Loan?
By definition, a business auto loan refers to a type of loan that allows you to purchase a car for business purposes. It is almost the same as a personal auto loan, except that a business auto loan may have higher borrowing limits and lower interest rates.
The loan is secured by the vehicle, meaning if the borrower fails to make timely or complete payments, the lender has the full right to possess the vehicle.
4 Ways To Finance Your Business Car
There are various types of business auto loans. We’ve listed and explained the four common types below:
1. Chattel Mortgages
A chattel mortgage is an agreement where the lender provides funds to a borrower to purchase a vehicle, and the borrower uses the vehicle as collateral for the loan. The borrower takes ownership of the vehicle at the time of purchase and pays back the loan with interest over a specified period.
It is a popular way to finance a business vehicle in Australia. And it’s got a key benefit for business owners: it reduces the overall cost of a business loan.
How so? Well:
- You can claim the interest paid on the loan as a tax deduction. This reduces your taxable income.
- It may make you eligible for GST input tax credits. This means you can claim back the GST paid on the vehicle’s purchase price and on any related expenses.
Plus, chattel mortgages offer fixed interest rates, which means that borrowers know exactly how much they will repay each month. This makes budgeting easy and predictable. You can learn more about chattel mortgages by reading this article from Westpac.
2. Hire Purchase
A hire purchase (HP) is similar to a chattel mortgage. The lender provides a loan to the borrower, which the borrower uses to buy a business vehicle. And the loan is secured by the vehicle.
However, the main difference between hire purchase and a chattel mortgage has to do with ownership. With a hire purchase plan, you get ownership of the vehicle once you’ve paid back the complete amount.
Apart from that, HP plans generally have higher interest rates as compared to chattel mortgages. But they also have more flexible repayment options. You can choose the length of the loan term, the size of monthly repayments, and the amount of the deposit. Plus, HP plans may include car service and maintenance as a part of the package.
3. Novated Lease
A novated lease is a three-way agreement between the employer, employee, and the finance company. The employer takes responsibility for the vehicle employee leases and its payments. And the lease payments are deducted from the employee’s pre-tax salary.
Note that the borrower does not get ownership of the vehicle throughout the lease term.
This type of car financing proves to be tax efficient for employees as it reduces their taxable income. But it’s not very beneficial for the business itself (unless you’re running a one-person business!).
4. Financial Lease
A financial lease is the same as a novated lease, except that the employee is responsible for lease payments, not the employer. This type of financing is also flexible and offers fixed interest rates.
Factors To Consider When Choosing A Plan
To choose the right financing option for your business vehicle, we recommend considering the following factors:
1. Budget
Consider your current stable revenue, profit margins, and other debts (both business and personal loans). Determine the budget you have for monthly repayments, insurance, and maintenance.
2. Tax Implications
All of the financing options mentioned above offer tax benefits. However, it’s worth noting that business owners can avail of greater tax deductions for a car that’s meant for only business. If it’s meant for both personal and business use, the tax deductions may reduce significantly.
So we recommend consulting a tax professional to determine how to maximize tax benefits when acquiring a business auto loan.
3. Ownership
Consider your day-to-day business operations as well as your business operations for the next 6-8 months. Determine if having car ownership impacts your business in a good way. If it does, you might want to opt for a chattel mortgage or HP plan that can help you own the vehicle much quicker than a novated or financial lease.
Conclusion
Obtaining a business auto loan offers a practical solution for acquiring a vehicle without exhausting your capital. With options such as chattel mortgages, hire purchase plans, novated leases, and financial leases, you can find a financing method that suits your needs. Consider factors like budget, tax implications, and ownership preferences when making your decision. By choosing the right financing option, you can ensure smooth and cost-effective transportation for your business while maintaining financial stability.
